ERP is not the sound you make when a bug flies in your face. Rather, it stands for Enterprise Resource Planning. And it almost always refers to a computer system for managing the business process throughout your entire organization (“enterprise”, get it?).
Enterprises work with resources (people, products, money, machines, etc.). To be profitable, a business needs to use those resources to provide value to their customers and do all that for less than they charge customers.
Many businesses start out with the founder “just knowing” what it takes to get the job done, and the price is set based on the founder’s knowledge. When starting out, the founder is often the only person working, or maybe they have a couple of staff, but the founder has direct knowledge of the costs of the business, and either takes home or invests the difference.
As the business grows, one of the first things most business owners do is invest in sales. The sales team is motivated by making the sale – but not motivated by making each sale profitable. The owner may have set the target price based on a very thin margin while a salesperson may think, “I’m only offering a 5% discount!”. Without knowing the costs to deliver each piece of work, this scenario can quickly imperil a business.
An ERP can help to manage situations like this. For example, an ERP has insight into the total cost of producing a product, from inventory costs to handling costs, from sales costs to storage costs, an ERP can track and report on all of these facets so the business stays profitable.
So, really, what is an ERP?
An ERP is a computer system that manages information about customers, vendors, inventory, costs, financial information, sales, purchases, warehouse transfers, manufacturing equipment, subcontract suppliers, etc. With all the information in one place, every user has insight on order status, inventory levels, manufacturing planning, and more.
This is really a deep statement. It is hard to fathom how much information is managed by an ERP without an example. So, let’s go! Imagine a business that sells and manufactures custom and stock signs. This company offers custom 3D, storefront, and tradeshow signs, and offers stock signage, like signs for restrooms, exits, etc. Each of the custom items uses some type of stock materials, is worked on one or more pieces of equipment, is packed in boxes with protective materials. (We know, there is more to making custom signs than this, but this is just an example!)
In a business like this, the salesperson usually makes first contact, and late delivers a quote. The customer will accept the quote, which turns into an order. The manufacturing planner gets the order, schedules the work on the various equipment, and then monitors and manages the order throughout production. After production, shipping gets the product and packs it, arranges shipping, and updates the order total with the shipping fees. Sometime in this process, the customer will call the salesperson or a customer service representative (CSR) and ask for the status of their sign. And this could be going on for dozens of customers at the same time, hundreds of times a week or more!
As the business was growing, it used QuickBooks to manage finances, an Excel file to calculate quotes (which were then transferred to QuickBooks), another Excel file to manage inventory, and the purchasing manager talked to a few vendors to get raw materials. The production manager installed a whiteboard to manage and see what equipment was in use and where there was free time on one. The shipping office used UPS online and sent the shipping information to the CSR to update the tracking number in the order. The salesperson emailed the CSR, production manager, shipping manager, his boss, and the founder to get status updates.
After they implemented an ERP, their manufacturing throughput increased, the distractions for work in progress were greatly diminished, and their profitability increased. Here’s why:
- The sales team was able to create quotes using the ERP. These quotes used templates defined by the business. The templates were up-to-date with the latest costs.
- The production manager used the online scheduling assistant and visual schedule to move jobs around and schedule production on the most profitable machines.
- The shipping manager knew what was in the pipeline and could make sure the right packing materials were available. The ERP automatically calculated shipping from a handful of vendors and added it to the customer order.
- The purchasing manager, assisted by the ERP’s automatic calculation of the best supplier, had the best-priced materials in house at the right time.
- The CSR had all the information in the ERP and no longer had to get up 25 times a day to look at the production board. This let the business owner defer hiring new CSRs.
- The sales team could see the projected job completion date and stopped sending emails to everyone.
- The owner and controller had financial information at their fingertips and were able to optimize allocation of financial resources to accelerate growth.
This is just a hypothetical example but reflects experience from companies that have made the switch to ERP systems.
Want to find out if an ERP is right for your business?
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